A-133-86
The Queen (Appellant)
v.
The Consumers' Gas Company Ltd. (Respondent)
INDEXED AS: CANADA V. CONSUMERS' GAS CO.
Court of Appeal, Pratte, Hugessen and Mac-
Guigan JJ.—Montréal, November 20 and 21;
Ottawa, December 2, 1986.
Income tax — Income calculation — Company distributing
gas required by public authorities to relocate portions of
pipeline network — Nature of payments received therefor —
Court of Appeal had decided payments not to be deducted
from undepreciated capital cost — No provision in Act making
them income — "Assistance" in s. 13(7.1) refers to grant not to
payments similar to ones made by private business to advance
own interests — Appeal dismissed — Income Tax Act, S.C.
1970-71-72, c. 63, s. 13(7.1) (as am. by S.C. 1974-75-76,
c. 26, s. 6(4)).
The respondent is a public company distributing natural gas
in Ontario. It receives the gas from trunk pipelines at a gate
station and distributes it through steel gas mains running
beneath the surface of streets and roads. Various organizations
(mostly public authorities) from time to time require the
relocation of portions of the pipeline network in order to do
construction work for their own purposes. In these cases, the
respondent calculates the costs associated with the relocations
and bills the party requesting them. The amount it can recover
may be limited by statute. It is common ground that the
respondent's expenditures respecting the relocations are for
capital account.
In R. v. Consumers' Gas Company Ltd., this Court held that
payments received for relocation work should not be deducted
from the gross cost of such relocation for the purposes of
establishing the undepreciated capital cost and calculating the
capital cost allowance under the Income Tax Act. The question
is whether such receipts should be brought into income. The
Trial Division held that they were for capital account and need
not be taken into income.
Held, the appeal should be dismissed.
The expert accounting evidence was that the receipts should
be treated as capital and not as income. Absent some provision
of the statute specifically bringing them into income, they
continue to be treated, as required by generally accepted
accounting principles, as capital receipts.
Subsection 13(7.1) of the Income Tax Act can not be applied
to reduce the capital costs of the assets. That subsection
provides that where a taxpayer has acquired depreciable prop
erty at a capital cost to him and has also received "assistance"
from a public authority respecting the property, the capital cost
is deemed the capital cost thereof minus the assistance. The
word "assistance" carries with it the colour of a grant or
subsidy. Here, the payments made to Consumers' Gas by public
authorities were made in the same way and for the same
reasons as payments made by private business, that is, for the
purpose of advancing the interests of the payor.
CASES JUDICIALLY CONSIDERED
APPLIED:
R. v. Consumers' Gas Company Ltd., [1984] I F.C. 779
(C.A.); Ottawa Valley Power Co. v. Minister of National
Revenue, [1969] 2 Ex.C.R. 64.
COUNSEL:
Gaston Jorré and Sandra Phillips for
appellant.
Mortimer S. Bistrisky for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Aird & Berlis, Toronto, for respondent.
The following are the reasons for judgment
rendered in English by
HUGESSEN J.: The respondent, The Consumers'
Gas Company Ltd., in the normal course of affairs
each year receives payments from third parties in
respect of certain pipeline relocation work carried
out at the latters' request.
This Court' has previously held that such
receipts should not be deducted from the gross cost
of such relocations for the purposes of establishing
the undepreciated capital cost and calculating the
capital cost allowance under the Income Tax Act
[S.C. 1970-71-72, c. 63]. The main question in the
present appeal is whether such receipts should be
brought into income.
The undisputed facts, which do not vary in any
significant respect from one taxation year to an
other, were fully but concisely stated by Urie J. A.,
writing for this Court in Consumers' Gas No. 1 [at
pages 782-784]:
R. v. Consumers' Gas Company Ltd., [1984] 1 F.C. 779
(C.A.), herein referred to as Consumers' Gas No. I.
The respondent is a public company having its head office in
Toronto, Ontario. It is engaged in the business of distribution
of natural gas to over 725,000 residential, commercial and
industrial customers in Ontario, and, as well, in the production
of natural gas, primarily from wells in Lake Erie and in the sale
and rental of gas appliances. Its business activities, including its
rates and accounting methods and practices, are subject to the
approval of the Ontario Energy Board. The vast bulk of its
revenue (approximately 95%) in the years in issue, was
attributable to its gas distribution business. The gas is mainly
received from trunk pipelines at a gate station outside its
operating area. From the gate station the respondent distributes
the gas through steel gas mains which generally run beneath
the surface of streets and roads. The individual customers are
provided with gas through pipes leading from the mains.
Various persons and organizations such as government
departments, municipalities, utilities, telephone companies and
other private companies from time to time require the reloca
tion of portions of the pipeline network in order to do construc
tion work for their own purposes. Usually such relocations are
required because of some physical conflict arising from the
construction work but they may also be undertaken for safety
reasons. The parties requesting the relocations may or may not
be customers of the respondent.
Whenever it can the respondent attempts to recover the full
cost of the relocations from the party requesting them. How
ever, the amount it can recover may be limited by the provi
sions of either The Public Service Works on Highways Act,
R.S.O. 1970, c. 388 or the Railway Act, R.S.C. 1970, c. R-2.
The respondent in all cases carefully calculates all elements of
cost associated with the relocations and bills the parties in full
for such costs or such part thereof as is permitted by statute.
Upon completion of the relocations the original pipe is
usually abandoned and left in the ground although certain
above-ground equipment such as parts of regulator stations
may be salvaged. In the latter event credit is presumably given
for the value of the salvaged equipment.
The average annual number of relocations in the taxation
years in question was about 225.
Prior to the decision of the Court in The Queen v. Canadian
Pacific Limited ([1978] 2 F.C. 439 (C.A.)) the respondent
treated reimbursements received from the parties for whom
relocations were undertaken in essentially the same manner as
it did for financial statement purposes, i.e., it reduced the
amount of the gross cost of its relocated pipe by the amount of
the reimbursements and added the net amount only to the
undepreciated capital cost of the class (class 2). In substance, it
took capital cost allowance on the net cost only. Incidentally,
for rate-fixing purposes that is one of the methods for treating
the reimbursements authorized by the Ontario Energy Board.
After the Canadian Pacific case the respondent took the posi
tion that for tax purposes it (a) was entitled to add the gross
cost of the relocations to the undepreciated capital cost of the
class and to claim capital cost allowance on the gross amount,
and (b) was not obliged to include the reimbursements in the
calculation of its revenues for tax purposes.
It is common ground on the present appeal that
the expenditures made by Consumers' Gas for
pipeline relocations in the circumstances described
are for capital account. In the judgment now under
appeal [[1986] 1 C.T.C. 380; 86 D.T.C. 6132; 2
F.T.R. 30], Muldoon J. in the Trial Division held
that the partially offsetting receipts from third
parties were also for capital account and need not
be taken into income for the purposes of the
Income Tax Act. In my view, he was right.
There is no dispute, and indeed the expert evi
dence called on both sides was unanimous on the
point, that generally accepted accounting princi
ples require these receipts to be treated in the way
that Consumers' Gas in fact treated them for
financial statement purposes. In other words,
proper accounting practice required that the
receipts be offset against the capital expenditure in
respect of which they were paid by third parties so
that only the net cost of the relocation be carried
to the asset side of the balance sheet. It was also
not disputed that Consumers' Gas' practice of
taking straight line depreciation over a period of
seventy years calculated on the net cost of pipeline
relocations was consistent with generally accepted
accounting principles. Finally, the expert account
ing evidence was that the receipts should be treat
ed as capital receipts and not as income.
The principal argument advanced by counsel for
the appellant is disarmingly simple. He urges that
the method employed by Consumers' Gas for
financial statement purposes, which is, as stated, in
accordance with generally accepted accounting
principles, results in the disputed receipts being
reflected 2 in the income statement. Hence, he
argues, the treatment accorded for income tax
purposes should also produce this result and the
receipts should be treated as revenues.
With respect, it seems to me that this approach
is flawed. It attempts to achieve the results pro
duced by generally accepted accounting principles
while rejecting the method. Although those princi
ples are a guide to the interpretation and applica
tion of the Income Tax Act, they cannot help
where the Act itself departs from them. This is
particularly so where one is dealing with the treat
ment to be accorded to the reduction over time of
the value of fixed assets due to aging, wear and
tear, etc. Accounting principles require that a
realistic estimate be made of the life of each such
asset, which must then be depreciated on a straight
line basis over that period. Income tax law, on the
other hand, for a variety of reasons many wholly
unrelated to sound accounting practice, fixes an
arbitrary percentage (which can even reach 100%)
for various classes of assets which may then be
applied on a declining balance basis to the cost of
the assets of each class and deducted from income.
Thus while it is true, as appellant argues, that
accounting principles require depreciation on the
net cost of capital assets always to be reflected in
income, that is not the case for purposes of income
tax. More particularly, on the facts of the present
case, the receipts from third parties in respect of
pipeline relocations are reflected in Consumers'
Gas' income for financial statement purposes
solely because they go to reduce the cost of the
assets upon which straight line depreciation is
taken over seventy years. The receipts themselves,
however, are not treated as income. They are
reflected in income, albeit faintly, because good
accounting, unlike income tax law, requires that
depreciation be taken. It is common ground here
that the cost of pipeline relocations is a capital
outlay and that the receipts from third parties in
2 The word "reflected" is carefully chosen: the receipts them
selves do not apppear as income but, by reducing net asset cost,
they go to reduce depreciation thereby indirectly increasing
income.
respect thereof need not be taken into account in
determining undepreciated capital cost for the pur
poses of calculating capital cost allowance. The
mere fact that this results in such receipts not
being reflected in income does not make them
income. Absent some provision of the statute
specifically bringing them into income, they con
tinue to be treated, as required by generally
accepted accounting principles, as capital receipts.
The submission therefore fails.
As a subsidiary argument, the appellant urges
that those receipts which are paid to Consumers'
Gas by "governments, municipalities and other
public authorities" (by far the larger part both in
number and in value) must be applied to reduce
the capital cost of the assets by the operation of
section 13 of the Income Tax Act. The actual text
invoked was changed during the taxation years
here under review but, on the view which I take of
the matter, it is enough to consider the amended
text, which is the one most favourable to the
Crown's position. It is subsection 13(7.1) (S.C.
1974-75-76, c. 26, s. 6(4)), which reads as follows:
13....
(7.1) For the purposes of this Act, where a taxpayer has
received or is entitled to receive assistance from a government,
municipality or other public authority in respect of, or for the
acquisition of, depreciable property, whether as a grant, sub
sidy, forgiveable loan, deduction from tax, investment allow
ance or as any other form of assistance other than
(a) an amount authorized to be paid under an Appropriation
Act and on terms and conditions approved by the Treasury
Board in respect of scientific research expenditures incurred
for the purpose of advancing or sustaining the technological
capability of Canadian manufacturing or other industry, or
(b) an amount deducted as an allowance under section 65,
the capital cost of the property to the taxpayer shall be deemed
to be the amount by which the aggregate of
(c) the capital cost thereof to the taxpayer, otherwise deter
mined, and
(d) such part, if any, of the assistance as has been repaid by
the taxpayer pursuant to an obligation to repay all or any
part of that assistance,
exceeds
(e) the amount of the assistance.
The key word in this text, as it seems to me, is
"assistance", which, in the context, clearly carries
with it the colour of a grant or subsidy. Here the
evidence is clear that payments made to Consum
ers' Gas by public authorities such as municipali
ties, Ontario Hydro and the like were made in
exactly the same way and for exactly the same
reasons as payments made by private businesses,
that is, for the purpose of advancing the interests
of the payor. In this regard, the comments of
Jackett P., interpreting the equivalent section of
the former Income Tax Act, are apposite:
Before attempting to reach a conclusion as to whether there
was a capital cost to the appellant of the additions and improve
ments, it is convenient to express my conclusion about the
application to the facts of this case of section 20(6)(h) which,
for convenience, I repeat:
20. (6) For the purpose of this section and regulations
made under paragraph (a) of subsection (1) of section 11,
the following rules apply:
(h) where a taxpayer has received or is entitled to receive a
grant, subsidy or other assistance from a government,
municipality or other public authority in respect of or
for the acquisition of property the capital cost of the
property shall be deemed to be the capital cost thereof to
the taxpayer minus the amount of the grant, subsidy or
other assistance;
What this rule appears to contemplate is the case where a
taxpayer has acquired property at a capital cost to him and has
also received a grant, subsidy or other assistance from a public
authority "in respect of or for the acquisition of property" in
which case the capital cost is deemed to be "the capital cost
thereof to the taxpayer minus ... the grant, subsidy or other
assistance". That rule would not seem to have any application
to a case where a public authority actually granted to a
taxpayer capital property to use in his business at no cost to
him. Quite apart from the fact that the rule so understood
would have no application here, I do not think that the rule can
have any application to ordinary business arrangements be
tween a public authority and a taxpayer in a situation where
the public authority carries on a business and has transactions
with a member of the public of the same kind as the transac
tions that any other person engaged in such a business would
have with such a member of the public. I do not think that the
words in paragraph (h)—"grant, subsidy or other assistance
from a ... public authority"—have any application to an
ordinary business contract negotiated by both parties to the
contract for business reasons. If Ontario Hydro were used by
the legislature to carry out some legislative scheme of distribu
ting grants to encourage those engaged in business to embark
on certain classes of enterprise, then I would have no difficulty
in applying the words of paragraph (h) to grants so made.
Here, however, as it seems to me, the legislature merely
authorized Ontario Hydro to do certain things deemed expedi
ent to carry out successfully certain changes in its method of
carrying on its business and the things that it was so authorized
to do were of the same character as those that any other person
carrying on such a business and faced with the necessity of
making similar changes might find it expedient to do. I cannot
regard what is done in such circumstances as being "assist-
ance" given by a public authority as a public authority. In my
view, section 20(6)(h) has no application to the circumstances
of this case.
(Ottawa Valley Power Co. v. Minister of National
Revenue, [1969] 2 Ex.C.R. 64, at pages 71-72).
I conclude that the appellant's subsidiary argu
ment also fails.
In the light of these conclusions, it is perhaps
unnecessary that I express any final opinion on a
procedural argument raised by respondent. Briefly
stated that argument is that the Minister cannot
now be heard to urge that the receipts in question
should be brought into income since that is not the
treatment he accorded to them in his original
notice of reassessment. Instead the Minister's posi
tion originally was that the receipts should be used
to decrease the undepreciated capital cost base.
Since the Minister cannot appeal from his own
assessment, it is the respondent's submission that
the Minister could not change his position before
the Trial Division so as to urge that amounts
which he had heretofore treated as capital receipts
should now be brought into income.
I cannot agree with this submission. What is put
in issue on an appeal to the courts under the
Income Tax Act is the Minister's assessment.
While the word "assessment" can bear two con
structions, as being either the process by which tax
is assessed or the product of that assessment, it
seems to me clear, from a reading of sections 152
to 177 of the Income Tax Act, that the word is
there employed in the second sense only. This
conclusion flows in particular from subsection
165(1) and from the well established principle that
a taxpayer can neither object to nor appeal from a
nil assessment.
I would dismiss the appeal with costs.
PRATTE J.: I agree.
MACGUIGAN J.: I agree.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.